|Jan Luiten van Zanden
26 January 2011
China has been one of the world’s most dynamic economies in recent decades, but how did it fall so far behind? This column argues that the industrial revolution occurred in Europe rather than China because European entrepreneurs were eager to adopt machines to cut down on high labour costs. China didn’t “miss” the industrial revolution – it didn’t need it.
One of the big debates in economics is about the causes of the arguably most dramatic change in development trajectory in (recent) world history, the industrial revolution.
There is consensus about the fact that this change in growth pattern started in northwestern Europe, and gradually spread to large parts of the western and, after a lag, eastern and southern world.
Why this happened, and where it happened are topics of heated debate among historians. The recent “Chinese miracle” – fabulous growth since about 2000 – has had an important impact on this debate.
The Great Divergence debate
Recent literature, most famously Kenneth Pomeranz’s The Great Divergence (2000), has suggested that China’s level of economic performance was more or less at par with that of Western Europe. Moreover, the lower Yangzi delta formed a core of economic prosperity comparable with the North Sea area, the most developed part of Western Europe.
In Pomeranz’s view, the fact that the industrial revolution occurred in England was due to fortunate geographic circumstances (the availability of cheap coal in the right places) and the fact that European countries had access to colonies, which China lacked.
This thesis has started a large international debate about ‘the Great Divergence’ among economists and economic historians. Pomeranz’s interpretation was perhaps not entirely convincing as it was largely based on qualitative evidence and some snips of quantitative information that could be interpreted in various ways.
Indeed, recent research by my colleagues and I on the development of wages and prices in China and Western Europe has produced results that do not support the Pomeranz hypothesis. It turns out that real wages in various parts of the country were at best half of those in the North Sea area (Allen et al. 2011). But it was also argued that wage labour was a rather marginal phenomenon in the Chinese economy, implying that real wage estimates are a poor guide to economic performance.
New comparative research
In a recent CEPR working paper with Bozhong Li (Li and van Zanden 2010), we go one step further and make detailed estimates of the structure and level of GDP per capita of two regions, which are among the most advanced parts of Western Europe (the Netherlands, with a level of GDP per capita comparable to that of England) and China (a more or less comparable region within the Yangzi delta, the Hua-Lou district).
The two regions have a lot in common.
But the picture changes radically when levels of productivity and income are compared. GDP per capita in the Netherlands is 86% higher than that of Hua-Lou district. Much of this is caused by a particularly large productivity gap in industry and services, where labour is at least twice as productive in the Netherlands. Only in agriculture is the gap between ‘East and West’ very small.
So why is labour in services and industry so much more productive in the West? Factor prices form probably a large part of the explanation – real wages in the Netherlands were at least 70% higher than those in the Yangzi Delta, but interest rates were much lower in the West (but data on interest rates in China are still very scarce and not very reliable). Since the late Medieval Period (in fact, since the Black Death of 1348), the North Sea area was a region with high real wages and low interest rates, and producers had developed and selected production technologies which are consistent with these relative prices. Meanwhile, in China – in the Yangzi delta and elsewhere – wages were much lower, and capital markets probably not that well developed as in Western Europe. A comparison of production techniques used in different industries is illuminating.
In China, water management was carried out largely by hand using sophisticated machines (see Figure 1 below). In the Netherlands the windmill had been adapted to service water management, resulting in the huge mills that dominated the rural landscape (Figure 2 is a design of one of the first 17th century mills). The same difference applies to oil pressing, a large industry in both regions. The Dutch developed a highly capital-intensive windmill technology to press their oilseeds, the Chinese version of this was driven, again, by humans or oxen. Inland transport along canals and rivers was pulled by horses in the Netherlands, by humans in China.
Figure 1. Pumping of water in the Yangzi Delta: A sophisticated machine driven by human labour
Figure 2. Pumping of water in the Netherlands: A sophisticated machine monitored by one miller (the first design of the typical Dutch windmill by Leeghwater, early 17th century)
Most famous is perhaps the different choice of technique in printing. Although the Chinese had invented the printing press, commercial printers preferred to use a more labour-intensive technology, woodblock printing. Since the middle of the 15th century, Western Europe concentrated on moveable type printing as the most important technology, which was a very capital-intensive process, with high levels of labour productivity. Figures 3 and 4 illustrate the difference in capital-labour ratio between the two technologies; typically, the pressing in China is done by humans, in Europe by a machine.
Figure 3. Advanced printing technology in China
Figure 4. The printing press as it was developed in Western Europe.
Perhaps Chinese and European producers had, as in the case of the printing press, in principle access to the same relatively advanced technologies, but radically different relative prices induced them to select different modes of production, resulting in the big gap in labour productivity that can be observed in the 1820s. The story for agriculture is different, however. There, land productivity was much higher in the Yangzi delta – where advanced systems of multiple cropping had been developed – and total factor productivity was much higher than in the West. This may have been a particular feature of “rice agriculture” in combination of very intensive forms of irrigation. It resulted in a level of labour productivity which was almost as high as in the Netherlands (or England). This also implied that, in the Yangzi delta, labour productivity in agriculture was much higher than in industry – the reverse of the “normal” structure of relative productivities known from the work by Simon Kuznets and Colin Clark. This may also have had consequences for structural transformation – it limited the incentives to move from agriculture to industry (although Hua-Lou district, with its high level of urbanisation, is probably not the best case in point).
This detailed comparison results in a very mixed picture of Chinese economic modernity compared with that of Western Europe. Yes, the Yangzi delta had a relatively advanced economy, with high levels of agricultural productivity and urbanisation and a high degree of structural transformation; we can accept this part of Pomeranz’s thesis. But this did not imply that it was “ready” for an industrial revolution.
The industrial revolution was a process of mechanisation in which expensive labour was substituted for by machines driven by coal – as Bob Allen (2009) has demonstrated. Chinese factor costs were not at all conducive to such a change.
Whereas entrepreneurs in Europe were very eager to develop new technologies that increased labour productivity via the capital-labour ratio, Chinese businesses barely had any incentive to do so. That the industrial revolution emerged in England was therefore not accidental or the result of luck, but the long-run effect of its fundamentally different factor prices, reflecting its different economic and institutional trajectory.
Allen, Robert C (2009), The British Industrial Revolution in Global Perspective, Cambridge University Press.
Allen, Robert C, Jean-Pascal Bassino, Christine Moll-Murata, and Jan Luiten van Zanden (2011), “Wages, Prices, and Living Standards in China, Japan, and Europe, 1738-1925”, to be published in Economic History Review, vol. 64, issue 1.
Pomeranz, K (2000), The Great Divergence. China, Europe and the Making of the Modern World Economy, Princeton University Press.
Li, Bozhong, and Jan Luiten van Zanden (2010), “Before the Great Divergence? Comparing the Yangzi Delta and the Netherlands at the beginnings of the nineteenth century”, CEPR Discussion Paper 8023.